Thursday, November 5, 2009

From Bloomberg:The Swedish Riksbank’s plan to keep interest rates at a record low for a further year risks fueling a house price bubble in the largest Nordic economy, some policy makers and economists warned.

The world’s oldest central bank proposes keeping its key interest rate at a record-low 0.25 percent until autumn 2010 to spur consumer prices after half a year of deflation. Governor Stefan Ingvestold lawmakers today “the responsibility for sustainable growth with regard to lending and house prices is largely beyond the Riksbank’s control.”

That is encouraging Swedes to exploit the European Union’s lowest borrowing costs to take on bigger mortgages. Homes in greater Stockholm are back at last year’s peak, mortgage lender SBAB estimates, adding to the “risk that a bubble will build up and eventually burst,” Riksbank First Deputy Governor Svante Oeberg warned at the meeting. Even so, the bank wants to keep rates “low for a long period of time,” it said last month.

“They’re in some kind of denial,” said Tina Mortensen, an economist at Citigroup Inc. in London. “I’m quite surprised that they continue to keep this very dovish tone.">>>MORE

Eventually the government might be forced to nationalize a large swath of the banking sector, but they'll be dragged kicking and screaming. Yesterday's non-bailout announcement aimed to preserve the status quo, and Obama himself dismissed the idea that the US could adopt the Swedish model in an interview with ABC...